Real estate has long been considered one of the most secure wealth building strategies. In recent years, more and more investors have been attracted to this asset class. And for good reason. Real estate is a fun and profitable way to invest, but there are some common pitfalls you should avoid as a new investor.
Like in the years leading up to the 2008 crash, just about anyone could make money in real estate. Today, things are changing. This is why it’s now more important than ever to prepare yourself. Without the right knowledge or experience, new investors can find themselves deceived, confused, and taking a loss.
So here are the eight common mistakes new investors often make, and how you can avoid them at all costs. Keep reading if you want to succeed as a real estate investor.
Mistake #1: Having a “Get Rich Quick” Mindset
Many newer real estate investors fall into the trap of believing that they will see massive results from their real estate investments in a short period of time. In today’s world of dopamine fueling social media feeds, there is a culture of immediate gratification. We need results now, or else the effort isn’t worth it. This isn’t helped by the abundance of courses out there preaching the same thing - that you can get rich in real estate in 30 days. These courses don’t explain that the success of the top real estate investors came from lots of sacrifice and hard work.
Many of our millionaire mentors have told us that the best things in life take time. Building a portfolio, powerful network, or a knowledge base of wisdom takes time. Real estate investors need to be patient and persistent in order to be successful. Finding a great real estate investment can take weeks or months. And once you find one that might make sense, having the discipline to thoroughly vet it is essential to protecting yourself from risk.
Mistake #2: Not Planning Enough
Investors need to have a plan with any given project. And not only should the plan be detailed, but it needs to include contingencies in case things take a turn in a different direction. Factors like interest rates, the economy, and the cost of construction are all factors that can be particularly volatile, especially in recent months. As a result, planning for bad days is the only way to prepare for them. Having a detailed strategy that includes how you plan to mitigate risk is essential.
Factors that go into a strategy include:
Timeline: how long will you hold the property for?
Investment Type: Will you be doing value-add? Turn-key? Or extensive renovations?
Exit Strategy: Do you plan to sell, or refinance? What happens if the market doesn’t support selling?
Tip: Determine the game plan, and then start looking for a property that fits the plan.
3. Not Conducting Thorough Due Diligence
When you’re buying something like a car or a new phone, you typically research the product before confirming the purchase. You probably find yourself going right to the reviews to see what other people have to say about it. And when you’re buying a car, there’s a good chance you took it for a test drive.
You should approach investing in real estate with a similar mindset. Conduct extensive due diligence (or research) before buying the property. You already understand (or should) that real estate is not a small investment. You are putting large amounts of money at risk. So, don’t make a big commitment like this before you verify that all of your underwriting assumptions are accurate or supported by the current condition of the property. The goal is to ensure that the property is a sound investment.
Before buying a property, here’s what you’ll want to do:
See the property at different points of the day and the week. This will give you a better understanding of the neighborhood.
Have a licensed professional formally inspect the property.
Use resources like SpotCrime to analyze crime in the area.
See if there are any encroachments on the property. If there are, don’t close on the property until they’ve been remedied.
Find out how much repairs will cost.
Have a formal appraisal conducted
This list doesn’t include everything, so make sure you connect with a more experienced investor to see what other steps you should take before buying a property.
Finding a real estate deal can be exciting. But you should always make sure to be patient and persistent, prepare a detailed plan, and do your research before making a commitment. This is a great approach to take if you're determined to avoid risk and be successful as a new real estate investor.